Editor's note

International Internet Magazine. Baltic States news & analytics Tuesday, 26.09.2017, 03:25

Latvian development: in search for a new “political economy”

Eugene Eteris, European Studies Faculty, RSU, BC International Editor, Copenhagen, 09.05.2017.Print version

After about half a century development the very first Latvian economic forum (LEF) was a sign of political and economic “elites” desire to shape country’s prospective future. With all positive aspects, the forum has shown that the country needs a considerate stimulus, which could be reached by creating a new national consensus on national “political economy” guidelines.

Latvia has joined, at last, already existing “club” of economic forums - various global, regional and national. LEF has gathered participants from all walks of socio-economic development discussed during the whole day numerous developmental issues: from information and communication technologies (ICT) industry to chemistry and pharmaceuticals to metals, machinery and manufacturing industry to knowledge economy and education… The forum organised by the Latvian Academy of Science (LAS) has made some vital steps towards creating a new narrative in Latvian political economy. 

Made in Latvia vs. “making in Latvia”

However, the forum’s title (“made in Latvia”), to my mind sounds little confusing. Of course, supporting national producers (goods and services “made in Latvia”) is a vital one; but making competitive goods and services is even more important. Only with the help of new technologies and new R&D national producers can be competitive in EU and the world.  

 

LAS vice-president and chairman of the national metals and machinery industry association, prof. Andrejs Krasņikovs mentioned a renewed role of industrial sector and machineries in country’s economy. However, he mentioned a decreasing labour productivity in Latvia: it has grown during last decade by only about 66%, one of the lowest in the EU-28. For example, labour productivity on EU’s average is at the level of € 32 while in Latvia it is about € 8,4. 

 

Knowledge, skilled workforce and investments are the main factors in innovative goods and services competitive both in the EU and globally. Though, according to Latvian economy ministry, the country will need by 2020 skilled workers in mechanical- and metal-processing sectors, as well as in energy, electronic and machine-construction. By ministry’s account, by 2020 the country will be in short of 15,7 thousand skilled workers, including 12,5 thousand engineers and PhD students, as well as about 750 specialists with doctoral degrees. 

Stimuli for innovations: political and financial

According to the EU-2020 strategy, the member states have to invest in R&D about 3% of GDP by 2020. However, for Latvia this figure is “allowed” at the level of 1,5%; only by 2030 the investments into science will reach the desired 3% of GDP. Presently budget allocation for R&D in Latvia, according to Andrejs Krasņikovs is about 0,8% and will reach 1.2% by 2017. 


According to industry sector’s representatives (e.g. Andis Sekatis), main share in Latvian manufacturing and “processing” industry belongs to: food processing (about 23% of the total), wood industry (28%) and machine- and metal-processing (17%) with about 19-20% of workforce in each. This “complex sector” is important for country’s GDP: its share in national export is about 20-30%.


However, the number of patents in Latvian industry is far from desired: with the highest in the Baltic region during 2008-09 and 2013, the number reduced drastically in 2014. (see table below). 


2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Latvia

9

10

18

42

49

32

28

25

80

8

Lithuania

1

2

9

11

13

9

14

19

22

24

Estonia

4

7

13

7

32

27

28

41

41

36

 Source: EU patent office, EPO.

 

Apparent progress in Latvia is within the digital agenda. Latvia is within 10 top internet users both in Europe and the world: about 76% houses and apartments are linked to webnet; during last seven years more than 31 thousand people went through free of charge internet courses. Latvia is among three European leaders in creating new digital companies (first is by Estonia, second by Sweden; Lithuania is at the 7th place).


However, resources for growth are numerous: interesting enough, according to Certus, foreign students actively “participated” in national economy: during 2015-16 the share of foreign students reached about € 148 million (about 0,6% of GDP).    

Latvian political economy: main issues

After 25 years of the renewed independence, a pivotal even took place in Latvian developmental history - first economic forum with the main idea of defining national economic identity and Latvian role in the EU and the world.


The forum has shown serious political and economic “elites” interest to increase growth and prosperity. Strategically, participants were unanimous that knowledge, skilled workforce and investments play vital role in creating competitive innovative goods and services both in the EU and globally. However, the lack of “combined” political-economic “instruments” hampers tactical steps to reach the optimal goal.      


Latvian development, as part of the EU economic policy, has been affected by the EU’s general political guidelines (including EU-2020 strategy) and by the EU Strategy for the Baltic Sea Region. In the “great Baltic Sea Area” there are already some effective developmental models, e.g. German managed capitalism and Nordic welfare system. Generous welfare ideology in numerous Nordic and western European states works perfectly well: guaranteed high-quality health care, free education, generous paid leaves for new parents, comfortable transport and infrastructure, clean air and water, to name a few. By most standards these models are offering its citizens a fairly decent life.


Most countries in the Baltic Sea Area are quite productive too although not so efficient as in the US. For example, these countries over all produce about a quarter less per person then in the US, but that’s mainly because they take more vacations and retire younger, which are not obviously bad things after all.


However, watching EU institutions in action one can see that the EU’s “deals” concerning the debt crisis that began in Greece and spread across much of Europe were quite shocking with the prevailed combination of callousness and arrogance.


Although the EU politicians and some big EU states’ leaders often seem wrong “about economics”: for example, though the austerity measures imposed on small states (e.g. Greece and Latvia) have been often economically disastrous, they continued to act.  

Politically, Eurocrats got away with this behavior because small nations were easy to bully, too terrified of being cut off from EU’s financial support to withstand unreasonable demands. However, the EU’s elite seemingly understand that they could make a terrible mistake if it can impose the same pattern of behavior to EU bigger states. This is what has lead to “already intimations of disaster in the negotiations taking place between the EU and Britain” argues Paul Krugman in The New York Times, May5, 2017.  

https://www.nytimes.com/2017/05/05/opinion/european-union-france-election.html?_r=0

 

A new narrative for the Latvian political economy is gathering strength at a time when European economic integration project is under stress and its future is subject to fierce discussion (some say it is even totally unclear). The national governments and political leaders need to find out the essence of national political economies, stop playing the blame game and instead rally save the European Union.


Like in Latvian development, the EU has a lot of shortcomings that needed to be addressed. Here the scientists’ plans have to be less bureaucratic to be “operative” and quick to understand: so-to-say, being agile, i.e. helping to do more with less efforts and resources, which are quite scarce in Latvia.


The idea of Latvian political economy can help: finding out what policies the government shall put in place, what economic system shall be adopted, to actually bring about necessary changes. Ideas abounded, from familiar solutions – retraining people to make sure they have the skills they need, reforming tax systems – to more radical ones.


Of course, the shape of the political economy in modern Latvia will depend on the decisions being made by the politicians and economists. But the main question remains: will Latvian be happy with the new decisions? Because when people are happy, then they are more energetic, more productive and more creative. The atmosphere of growth can really boost happiness.


Let’s be clear: Latvian policy and economy elites are getting a time-limited chance to mend the errors and find a “proper marriage” between politics and economics. Still most of Latvian political parties proclaim ideological rather than economic priorities…

 

 





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